Domenico De Sole is chairman of Tom Ford International, the menswear brand that now includes beauty, accessories, fragrance and footwear. He is a lawyer by training, but made the transition to the fashion business when Gucci — one of his clients — hired him to join the company. That was in 1984. Over the next 20 years until his departure from Gucci in 2004, he engineered a remarkable turnaround, saving the company from hostile suitors and acquiring such key brands as Yves Saint Laurent and Alexander McQueen. Indeed, in the fashion world, the standard phrase for managing a successful turnaround has become “doing a Gucci.” Knowledge at Wharton asked De Sole to talk about the fashion business in a down economy, the consumer mentality, leadership and how he has managed to be so successful in what might be considered a turbulent industry.

An edited transcript of the conversation follows.

Knowledge at Wharton: Thank you for joining us.

Domenico De Sole: You’re welcome.

Knowledge at Wharton: My questions to you a year ago would have been very different than they are today.

Domenico De Sole: I’m sure.

Knowledge at Wharton: Given what’s going on in the economy in general — and in the fashion business, in particular — how’s business today? And what strategies are you adopting to minimize the downturn?

De Sole: Business — I’m talking about in general — is very difficult for all the luxury companies. They have been through an obviously huge crisis last fall that is continuing. I have been in the business a long time, and I have never seen anything that was so deep and so worldwide. Asia is still working reasonably well, China is still growing, Hong Kong is still growing, but every other country has had very difficult times. Business has been very, very weak.

There are a lot of factors — obviously the general economic situation [is one]. Japan’s economy has been very difficult for a long time now, and this year particularly [so]. I was in Japan last week and it was all over the press that exports in Japan have declined 46% in the last quarter. So you can imagine how [hard] it is for the economy.

Domenico De Sole, chairman of Tom Ford International, shares his perspective on the fashion business in a down economy

In the United States, it is a combination of factors impacting the luxury industry. The first one is certainly the general economic situation, the financial meltdown of this fall, but on top of that there is another factor occurring in the United States. At the beginning of November last year, one department store in particular that carries a lot of luxury brands suddenly went on sale. A very radical approach. Marking everything down 70%. This created a very complex situation because the whole fashion business — and all the great luxury companies — have stores in New York, so we were confronted with a very complicated situation.

Some followed the lead and marked down products in a way which was really unprecedented. Obviously it’s very difficult to tell your consumers now that, in the spring season, products are full-price, that they are supposed to buy [at] full-price, something they were giving away three months ago. So I think in the United States there is an added factor that is creating a difficult time for luxury brands.

But business is difficult everywhere, as I said, with the exception of China and Hong Kong. Korea actually is doing reasonably well because the won has depreciated so there are a lot of tourists who go to Korea to buy luxury goods. But by and large, it’s a very difficult climate. I sense, and actually I believe, that 2009 is going to be a very, very difficult year. I doubt that there’s going to be a recovery [in 2009]. And I think we probably will continue to have difficult times in 2010 with the situation improving towards the end of 2010/2011. So I have a rather realistic — I wouldn’t say pessimistic — view.

However, there are really a lot of schools of thought about the long term.  I’ve been around for a long time and I always have always heard after horrible situations — like economic depressions or events like 9/11 — I’ve always heard: “Things have changed forever.” I just don’t believe it. I think that consumers — people — forget. It’s human nature. People are optimistic — most of them — by nature. So I am convinced that obviously we will do quite well. The luxury industry will come back. The real question that nobody knows [the answer to] is how long it’s going to take. Nobody knows. My guess is that it’s going to take some time. But long term, I’m quite optimistic.

Knowledge at Wharton: What kind of strategy would you suggest a luxury goods company follow?

De Sole: The strategy for all luxury goods — and I think excellent managers understand this strategy — should be the traditional set of managing for cash in difficult times. Watch your costs very aggressively. But, at the time same, stay the course with the brand. Discounting prices really doesn’t make a lot of sense. At the end of the day, it is imperative for luxury companies to deliver good value. It doesn’t mean the price has to be lower. Just make sure that whatever is delivered is a good value — great quality, great fashion, great brand…. The savviest people know that the number one [strategy] is to stay the course.

Knowledge at Wharton: I know that attorneys are often hired by the people they represent. But to go from a job handling tax matters for a Washington, D.C. law firm to becoming CEO of Gucci, that’s quite a switch. Why did you make that move, and why do you think it worked so well over that 20-year time span?

De Sole: First of all, the move was really by chance. I was representing one side of the Gucci family. The company had a huge tax problem at some point back in the early 1980s. Some [family members] asked me to become president of Gucci America to help them resolve the tax issues, which I did. In the meantime, the American company had a lot of problems. So I fixed the problems and stayed there. The company did quite well, actually. When the last family member took over the company, unfortunately, he was not the best manager. In 1994, the old group went bankrupt — stopped paying employees — so the shareholders at the time, a private equity company, purchased the shares of Maurizio Gucci. The other members of the family asked me in 1994 to move from the United States to Italy where I became the CEO of Gucci Group. That [just] happened to me. There was no planning there. In fact, [at one point] in 1994, I considered going  back to be a lawyer until I got a phone call and I was asked to move to Italy to see if I could fix the company.

Knowledge at Wharton: You are credited with saving Gucci from bankruptcy — making it profitable and prestigious once again — by using what one newspaper called “American style management practices.” I’m wondering what those practices were and how you implemented them.

De Sole: I would say that has been defined very simply. The company was broke in 1994. I tried to liquidate business in a very rational, analytical way. Most important, I am a very driven person, and I think I had very clear ideas at that time because I had already served for several years as president of Gucci America. So I had a pretty good understanding of the company’s problems. I just parachuted into a situation which was catastrophic. But by the same token, I recognized that there were a lot of very competent people, and I thought that I turned out to be a good leader. I rallied them and made sure that everybody understood the direction we were going. I always was able to deal with people well. I came from a culture also in which I recognized talent, so I’m not afraid of surrounding myself with competent people. And most important, I was very lucky because the other survivor who was there as the company was collapsing was Tom Ford. They wanted to fire Tom Ford, but I thought that was really stupid. I thought Tom Ford was quite good.

Knowledge at Wharton: As a designer.

De Sole: As a designer. I said, ‘Well, I think this guy is great’. So I convinced Tom to stay — to become creative director of the company. It was a brilliant decision because Tom turned out to be probably the great designer of the last 50 years. And we work well together. But not only with him. We had a great team. I was able to get everybody on the same page. We had a very clear strategy. Everybody understood where we were going. And we made decisions very quickly. There was this great sense of urgency, and so everything worked out well. In fact, when I arrived in Florence from the United States after leaving Gucci America to take over the company, the CFO of InvestCorp, which was the owner of Gucci at the time, welcomed me in Florence. We were in the cafeteria and he said: “Well, I hope you can do something here because Gucci is an albatross around our neck.” Less than two years later, they sold the company and made $2 billion in profit.

Knowledge at Wharton: There are stories about high-profiled, high-powered businessmen executives starting out together in a business relationship and then for some reason coming to blows. I know that you and Tom Ford bring different strengths to the current partnership at Tom Ford International, but that aside, what makes the relationship between the two of you work so well?

De Sole: First of all, there’s a great relationship of trust in the sense that I trust Tom 1,000% and I think he trusts me 1,000%. The second thing I think is that we have very deep respect. Tom is a creative genius. Also, I really do believe that in life, to be successful, you have to have knowledge of two important things: one, what you know, and two, what you don’t know. I’m totally aware that I’m not a creative person. I understand a collection. I can tell you if it’s going to sell, or not going to sell. I do very well with that. But I’m not a creative person. I wouldn’t know how to do it. I have a great immense respect for Tom and his expertise. So there is a very clear definition of roles.

Also, I have to tell you that I really have an extraordinary admiration for Tom. You see, as a businessman, you can learn about merchandise. You can learn about stores. You can learn to understand what is a good product, what is a bad product, what is a good fashion show, what is not a good fashion show. However, being creative is a totally different universe. I think creative people can see things that normal human beings cannot. So, and always, most importantly, I treat Tom with immense respect…. Businessmen are a dime a dozen. Creative people are truly extraordinary. 

Knowledge at Wharton: Do you have a sense of how social networking sites, viral marketing, buzz marketing, product placement, all these new marketing techniques — how they are changing the way we perceive and buy fashion?

De Sole: There are a lot of ways these days to get your story around. I would say that over the last year I’ve seen [some of them] become very, very important. It was started a long time ago with celebrities being dressed by designers. That [phenomenon] has become very popular, [helped] by all sorts of gossip magazines [covering] who’s wearing what, when. It has been spread [even more] by the Internet. So it has become much more prominent and important.

By the same token, I really do believe that excellent PR and the ability to project the image of the brand consistently is still very, very important. That’s one of the real great strengths of Tom. Not only do we have a great designer who can design beautiful clothes and wonderful accessories [but we have someone] with an amazing eye and amazing marketing ability. He’s done some of the greatest campaigns. I still buy old-fashioned magazines just to look at the ads. It’s amazing to me how many people now are redoing what we were doing with Tom in1994 and1995. Tom was really avant-guard.

Knowledge at Wharton: Given all these marketing techniques though, do you feel that it’s more difficult to control the brand image?

De Sole: Yes and no. At the end of the day, it is very, very important to be very disciplined with everything you do. I think that can always be controlled. I think it’s up to the management of any brand to make sure that the image of the brand is always controlled.

Knowledge at Wharton: In what ways do you think that the financial downturn has changed consumers? You started out talking about this, about how consumers are now pushing back on price. They are much more sale and discount conscious. Will this be a long-term change or, as you touched on earlier, might they revert back to their old ways once the recession is over?

De Sole: Again, nobody knows the real answer. But my instinct tells me that this difficult time is going to last. It’s not going to be fixed in a few months. I think that people obviously are very concerned. But my experience is that at the end of the day, the consumer forgets. People love luxury brands. Historically, if you think about it, during the Stone Age, people were buying bracelets and earrings made of stone. So it’s something that’s part of human nature. My sense is that things will get back to being good. The real issue is, that it’s going to last some time. I think that it’s going to be a year, or two, or three. But nobody knows.

Knowledge at Wharton: Can you name two or three leadership qualities that you think an executive needs to manage successfully?

De Sole: Yes. First of all, I really do believe that the most important thing is to be able to communicate effectively with your own people…. I had this habit from day one that I would go into the cafeteria of the company in Florence, and I continued that throughout my career. Every two or three weeks I would talk to people — everybody, including cleaning people — and just tell them how the company was doing, what we were trying to do. I think it’s very important that everybody in the company understand what the mission is, what we are trying to do. Everybody is trying to be on the same page. I think that’s the most important thing in leadership.

Obviously the second thing would be to hire very competent people. That was a little bit natural for me because you have to understand I came from legal background. If you are in a law firm, it’s not very hierarchical. And if somebody was number one in his class at Harvard Law School, for example,  it doesn’t matter that he or she is young. There’s respect for intellectual ability. I always wanted to hire competent people. And I want to hear what they have to say. It’s very important for a leader to be open-minded and invite debate and [get] people to talk about the issues very openly.

Also, the last family member who ran [Gucci] was doing a lot of things that I thought didn’t make any sense. So, in part, I learned a negative way just by looking at what was going on and [wondering] why these guys are doing this. I remember this one example: Every time there was a problem, this gentleman would try to find out who [had caused] it. That was basically silly. In a company, it is an issue of processes. If a mistake is made, I don’t care who’s done it. We have to understand why we made the mistake and just make sure that we look forward and don’t repeat it. This sort of hunt for the culprit I thought was very silly.

So we had a great management team. We became really stars in the industry because of a phenomenal management team. We hired all the best people. It was a very open management style. My door was always open. I would talk to anybody. I tried to hire great people and let them do their job. We worked very well.

Knowledge at Wharton: What are your expansion plans going forward for Tom Ford International?

De Sole: We are a very young company. We opened — with really immense success — our first store in New York just a year and a half ago. We are now present in some of the best locations — Bergdorf Goodman, Neiman Marcus in the United States, Harrods in London. We opened a beautiful store in Milan last year. So the plan for the next year and half is to open in the United States in Beverly Hills and in probably Las Vegas. We’re looking at a project there. Obviously the most important step would be to expand in Asia. We’ll be opening this fall in Yoshikin in Tokyo and in the Galleria in Korea, which is like the Bergdorf Goodman of Korea, and then looking at China and Hong Kong. So that would be the next step…. I was really not expecting the economy to collapse, but that’s life, you know. You have to manage whatever comes your way.

Knowledge at Wharton: My last question is, what advice would you give to any man or woman who has just been named head of a fashion house?

De Sole: I would, because of the difficult times, manage for cash. But the most important thing is, some would say, just stay the course. You understand what your brand is all about. You can’t really start changing everything — that would be the worst thing to do. Stay the course. One thing I also found that was very, very important in our business — I spend an enormous amount of time visiting stores. I used to talk to the store people all the time. Because if you really want to know what is going on in the retail business, you should go and talk to the sales people. They are there. They see the customers every day. They know what is working. So my biggest advice is just devote the time [to do this]. At the end of the day, the store is the soul of the brand. You know, most people are not sophisticated about fashion. A brand is your store. For example, if you mention Chanel to people, they think immediately about the Chanel store. So traveling to stores, being in them, understanding the store, making sure the brand is properly presented — I think this is very important. If you want to be an effective CEO of a brand, devote time to understanding your market.

Knowledge at Wharton: Thank you for joining us today.